How HSBC Holdings plc Could Rocket 138% In 5 Years

The shares of leading FTSE 100 bank HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), currently trading at 606p, have risen 17% over the last five years, lagging the 57% gain of the index.

But the story could change over the next five years, as HSBC’s shares have the potential to rocket 138%.

Here’s how

Like all banks, HSBC has gone through a period of significant restructuring and cost-cutting since the financial crisis of 2008/9. The Board has “no doubt that a stronger HSBC is emerging from this process”, and that the bank has “strong potential for growth”.

In particular, HSBC has positioned itself to capitalise on two major long-term trends: growth of international trade and capital flows; and rising wealth, particularly in Asia, the Middle East and Latin America.

City analysts are as optimistic as HSBC’s management that the bank is well-positioned for growth. The analysts are forecasting that earnings per share (EPS) will increase at a compound annual growth rate (CAGR) of just over 12% from last year’s 51p to 90p by the year ending December 2018 — a total increase of 76%.

hsbcIf the shares track earnings, and continue to rate on their current historic price-to-earnings (P/E) ratio of 11.9, the price will of course rise by the same 76% as EPS, putting HSBC’s shares at 1,069p five years from now.

Furthermore though, the analysts’ earnings forecasts point to a company whose performance, 10 years on from the financial crisis, would merit a higher P/E. If HSBC re-rated to the FTSE 100’s long-term average historic P/E of 16, we’d see the shares at 1,440p — a 138% rise from today’s 606p.

Investors would also bag five years of chunky dividends, as today’s starting historic yield is 5% and analysts are forecasting a dividend CAGR of around 11%. We’d see a total of 194p a share paid out over the period. Put another way, a £1,000 investment in HSBC today would deliver £320 in dividends alone.

There's no guarantee that earnings and dividends will play out as the analysts are forecasting, or that HSBC's shares will re-rate to the Footsie's long-term average P/E. However, history tells us that companies are capable of delivering the kind of return I've outlined here; indeed, even higher gains in some cases.

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G A Chester does not own any shares mentioned in this article.